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Piramal Healthcare: The R&D impact
May 8, 2012

Piramal Healthcare has announced its fourth quarter results of financial year 2011-2012 (4QFY12). The company reported growth of 16% YoY in sales and net loss of Rs 387 m as against Rs 2,019 m profit in the comparable quarter last year. Here is our analysis of the results.

Performance summary
  • Sales increase by 16% YoY primarily due to the growth in sales of pharma solutions and critical care business
  • Operating profit margins decrease by 210 bps (2.1%) to 6% due to a huge increase in R&D expenditure
  • At the PBT level, the company reports a loss on account of sharp rise in interest costs and fall in other income as a part of excess cash was used to buy a minority stake in Vodafone
  • Net losses stood at Rs 387 m as against profit of Rs 2,019 m in 4QFY11 on account of losses before taxes

Financial performance: A snapshot
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Net sales 5,592 6,490 16.0% 16,731 21,329 27.5%
Expenditure 5,141 6,099 18.6% 17,287 21,598 24.9%
Operating profit (EBIDTA) 452 391 -13.5% (556) (269) -51.7%
EBDITA margin (%) 8.1% 6.0%   -3.3% -1.3%  
Other income 1,301 391 -69.9% 3,358 2,194 -34.7%
Depreciation 260 337 29.5% 959 1,293 34.9%
Interest 168 1,627 865.9% 888 2,155 142.6%
Profit before tax 1,324 (1,182) -189.3% 954 (1,522) -259.5%
Tax 163 (111)   36,789 56  
Exceptional Gain / (Loss) (15) (21)   163,665 (57)  
Forex (Gain) / Loss (878) (718)   (986) (2,787)  
Minority Interest 4 14   3 38  
Profit after tax/(loss) 2,019 (387)   128,813 1,115  
Net profit margin (%) 36% -6%   8 0  
No. of shares (m) 210 173   210 173  
Diluted earnings per share (Rs) 9.6 (2.2)   615 6  
Price to earnings ratio (x)*   24.6        

What has driven performance in 4QFY12?
  • Piramal Healthcare's net sales increased by 16% YoY primarily due to the growth in sales of the pharmaceuticals solutions business. Pharma solution business grew by a modest 12.2% YoY. The critical care business also performed well by growing at 13.7% YoY. However, the OTC business performed miserably with a 26% YoY degrowth. The financial services business clocked revenues of Rs 267 m which was substantially higher than in the previous quarter (QoQ). The management re-iterates that the pharma solutions business and the critical care businesses are expected to do well over the next few years.

    Revenue break-up - Continuing Business
    (Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
    Pharma Solutions 3,493 3,919 12.2% 10,206 13,545 32.7%
    Critical Care 1,160 1,319 13.7% 3,877 4,126 6.4%
    OTC & Opthal 676 501 -25.9% 1,958 2,200 12.4%
    Financial Services Income - 267   - 534  
    Other 263 483 83.7% 689 926 34.4%
    Total Sales 5,592 6,489 16.0% 16,730 21,331 27.5%

  • In the current quarter, the company's operating profits (EBITDA) decreased by 13.5% YoY mainly due to higher R&D expenditure. As the division of Piramal Life Sciences Limited (PLSL) was demerged into Piramal Healthcare in the previous quarter, it led to a shoot up in the R&D expense by 520 bps. However, the reduction in other expenditure of 460 bps provided some cushion.

  • The interest income (part of other income in the table) decreased by 69.9% YoY as the company invested a part of surplus cash to buy 11% stake in Vodafone India. Even though the company is cash rich, it does not plan to pay back its existing debt as the loans are available at a very attractive rate of interest in the form of External Commercial Borrowings (ECB).

  • Despite lower profits at the operating level, the company reported net losses due to higher interest outgo along with a decrease in other income. Net losses stood at Rs 387 m as against profit of Rs 2,019 m in 4QFY11.

What to expect?
At the current price of Rs 442, the stock is trading at a price to earnings multiple of 10.1 times our estimated FY14 earnings.

An element of uncertainty remains with respect to the NCE business and the company's foray into financial services as it will be a while before the latter business begins to take off. Thus, it would be difficult to assign a specific value at this point in time. But based on the growth prospects of the continuing businesses and the investments on its books, we maintain a positive view on the stock.

Editor's Note: The interest outgo is higher in FY12 as the company has taken foreign currency loans at a much lower interest rates (3-4%). The company does not plan to retire these loans as the company is easily able to invest the cash at much higher interest rate.

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